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Chapter 4 Inventory Control Known Demand
Introduction <ul><li>Importance of inventory </li></ul><ul><li>Types of inventories </li></ul><ul><li>Motivation for holdi...
Importance of inventory <ul><li>Investment in inventories is enormous </li></ul><ul><li>Companies that use scientific inve...
Breakdown of the Total  Investment in Inventories  in the U.S. Economy (1999) Fig. 4-1
Types of inventories <ul><li>Raw materials </li></ul><ul><li>Components </li></ul><ul><li>WIP </li></ul><ul><li>Finished g...
Motivation for holding inventories <ul><li>Economies of scale ( setup cost ) </li></ul><ul><li>Uncertainties:  (demand, le...
Characteristics of inventory systems <ul><li>Demand </li></ul><ul><ul><li>Constant versus variable </li></ul></ul><ul><ul>...
Relevant costs <ul><li>Holding cost </li></ul><ul><ul><li>Warehousing  (Providing space, Material handling, Labor) </li></...
Inventory as a  Function of Time Fig. 4-2
Relevant costs (cont’d) <ul><li>Order cost </li></ul><ul><li>Penalty cost (shortage cost) </li></ul>
Order Cost Function Fig. 4-3
Inventory Control The EOQ Model
Assumptions <ul><li>Demand rate  λ  (units per unit time) is known and constant </li></ul><ul><li>Shortages are not permit...
Inventory Levels  for the EOQ Model Fig. 4-4
<ul><li>Choose  Q  to minimize the average cost per unit time </li></ul><ul><li>fixed+proportional order cost per cycle:  ...
The Average Annual  Cost Function G(Q) Fig. 4-5
Reorder Point Calculation  for Example 4.1 Fig. 4-6
Reorder Point Calculation for Lead Times Exceeding One Cycle Fig. 4-7
All-Units Discount  Order Cost Function Fig. 4-9
Incremental Discount  Order Cost Function Fig. 4-10
Average Annual Cost Function  for Incremental Discount Schedule Fig. 4-12
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Inventory Control

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Transcript of "Inventory Control"

  1. 1. Chapter 4 Inventory Control Known Demand
  2. 2. Introduction <ul><li>Importance of inventory </li></ul><ul><li>Types of inventories </li></ul><ul><li>Motivation for holding inventories </li></ul><ul><li>Characteristics of inventory systems </li></ul><ul><li>Relevant costs </li></ul>
  3. 3. Importance of inventory <ul><li>Investment in inventories is enormous </li></ul><ul><li>Companies that use scientific inventory control methods have a significant competitive advantage in the marketplace </li></ul>
  4. 4. Breakdown of the Total Investment in Inventories in the U.S. Economy (1999) Fig. 4-1
  5. 5. Types of inventories <ul><li>Raw materials </li></ul><ul><li>Components </li></ul><ul><li>WIP </li></ul><ul><li>Finished goods </li></ul><ul><li>Other (spare parts…) </li></ul>
  6. 6. Motivation for holding inventories <ul><li>Economies of scale ( setup cost ) </li></ul><ul><li>Uncertainties: (demand, lead time, supply) </li></ul><ul><li>Speculation (price increase) </li></ul><ul><li>Transportation (pipeline inventories) </li></ul><ul><li>Smoothing (seasonality) </li></ul><ul><li>Logistics (supply, production, distribution) </li></ul><ul><li>Control costs (large inv. Of inexpensive items) </li></ul>
  7. 7. Characteristics of inventory systems <ul><li>Demand </li></ul><ul><ul><li>Constant versus variable </li></ul></ul><ul><ul><li>Known versus random </li></ul></ul><ul><li>Lead time </li></ul><ul><li>Review time (continuous review, periodic review) </li></ul><ul><li>Excess demand </li></ul><ul><ul><li>Backordered </li></ul></ul><ul><ul><li>lost </li></ul></ul><ul><li>Changing inventory (perishability, obsolescence </li></ul>
  8. 8. Relevant costs <ul><li>Holding cost </li></ul><ul><ul><li>Warehousing (Providing space, Material handling, Labor) </li></ul></ul><ul><ul><li>Taxes and insurance </li></ul></ul><ul><ul><li>Spoilage, deterioration, and obsolescence </li></ul></ul><ul><ul><li>Opportunity cost of alternative investment </li></ul></ul><ul><li>Ordering cost (setup cost) </li></ul>
  9. 9. Inventory as a Function of Time Fig. 4-2
  10. 10. Relevant costs (cont’d) <ul><li>Order cost </li></ul><ul><li>Penalty cost (shortage cost) </li></ul>
  11. 11. Order Cost Function Fig. 4-3
  12. 12. Inventory Control The EOQ Model
  13. 13. Assumptions <ul><li>Demand rate λ (units per unit time) is known and constant </li></ul><ul><li>Shortages are not permitted </li></ul><ul><li>No lead time </li></ul>
  14. 14. Inventory Levels for the EOQ Model Fig. 4-4
  15. 15. <ul><li>Choose Q to minimize the average cost per unit time </li></ul><ul><li>fixed+proportional order cost per cycle: K+cQ </li></ul><ul><li>Cycle length: T=Q / λ </li></ul><ul><li>Average inventory level per cycle: Q/2 </li></ul><ul><li>Average cost per unit time: </li></ul><ul><li>G(Q) = (K+cQ)/T + hQ/2 </li></ul><ul><li>= K λ /Q+ λ c+hQ/2 </li></ul>
  16. 16. The Average Annual Cost Function G(Q) Fig. 4-5
  17. 17. Reorder Point Calculation for Example 4.1 Fig. 4-6
  18. 18. Reorder Point Calculation for Lead Times Exceeding One Cycle Fig. 4-7
  19. 19. All-Units Discount Order Cost Function Fig. 4-9
  20. 20. Incremental Discount Order Cost Function Fig. 4-10
  21. 21. Average Annual Cost Function for Incremental Discount Schedule Fig. 4-12
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